To Serve DC Plans, Know the Need

Participants in defined contribution (DC) plans today cannot count on strong stock market returns to build their savings. In today’s slower-growth, lower-expected return environment, they need guidance to get and stay on the path to retirement readiness. Employers are seeking to help them by forging partnerships with independent financial advisers who can provide sound, unbiased help to their participants.

This trend presents certain advisory firms and recordkeepers with substantial opportunities. To capture them, firms have to understand the unique needs of both participants and plan sponsors, and to develop the unbiased advice strategies necessary to make retirement a success for millions of Americans.

Ongoing partnerships with plan sponsors and research about DC plan participants’ needs—including findings gleaned in the most recent State Street Global Advisors DC Investor Survey published in January 2013 (see “Employees Willing to Hand Over Retirement Savings Reins”)—provide deeper insight into the distinct challenges at different stages of employees’ engagement and have uncovered areas of opportunity where advisers can provide valuable support. We call these stages “Entrances, Exits and In Between.”

Entrances: Plan Enrollment

Employees understand the value of participating in their employer’s retirement savings plan, but many plan participants find the enrollment process daunting. Some are confused about which steps to take and how to take them, while others lack confidence in their ability to make the right decisions— what savings rate they should select or which investments to choose to achieve their retirement savings goals. One-quarter of participants said there were too many decisions, and one-third told us it was hard even to understand which decisions they had to make.

Plan participants especially want help in two areas. One is deciding how much to save: Six in ten 401(k) participants had difficulty making this decision, and more than one-third of those who said the task was difficult want expert help. The other primary topic they want help with is investing: Four in 10 want guidance to ensure that their investment selections are appropriate, and among those who found investing difficult, three-fifths want expert assistance.

Plan sponsors want advisers and/or recordkeepers who can meet their employees’ needs with services that are unbiased, based on sound financial planning principles. They seek firms that will work in partnership with them to guide employees through the enrollment process. Explaining the most important decisions at enrollment and how to take action, through services such as retirement planning workshops and one-on-one counseling, can make a difference. Likewise, employers want advisory firms to clearly define service levels and associated fees—and they do not want the firms to charge commissions.

In Between: Accumulating savings and transitioning to retirement

Most plan participants understand the importance of saving enough to live comfortably in retirement. But, they generally do not feel confident about their ability to determine whether they have saved enough, or how to turn their savings into a retirement income stream that will last their lifetime.

The following types of communication and education are most useful for plan participants, listed by order of importance:

Guidelines on how to invest as they approach retirement.

Ideas for how to save more, and

Tips on how to reduce spending.

Firms providing advice and guidance should consider developing offerings that can be delivered not only to individuals, but also to broad participant populations via group seminars, webcasts, newsletters, educational videos and other formats.

Plan sponsors’ fiduciary obligations require them to screen providers of financial advice to ensure they are properly qualified. Employers will be inclined to work with recordkeepers and advisory firms that facilitate this process.

Exits: Help preserve retirement savings through transitions

Employees must make crucial decisions about their plan savings when they transition to a new employer or retire. Choosing unwisely can seriously impede their ability to accumulate enough savings to retire. Yet many participants find their options confusing or overly complicated.

Upon leaving an employer, plan participants are most likely to roll their retirement savings into an IRA or into their new employer’s retirement plan. The youngest respondents are much more likely than the general employee population as a whole to cash out all or some of their savings when they change jobs. Cashing out tends to be easy. Young participants may not fully understand their options and the implications each has for their future financial well-being. Almost half of these younger workers said it was the first time exiting a plan, so they did not know what to do, while one-third felt they did not receive clear direction about their options. Meanwhile, only one-third said the guidance offered by their HR department or benefits provider was helpful.

Plan sponsors have their own needs for transition programs. They increasingly want to make sure information provided is not biased in favor of the recordkeeper’s own rollover IRA. Companies offering advice can meet these needs by ensuring that transition-related materials spell out the costs and benefits of each option in clear, impartial language. Consider displaying the likely impact cashing out could have on future income, and possibly creating a package targeted toward young workers.

Every business needs to know its customers. Firms interested in providing financial advisory services to the DC market face the challenge of understanding the different needs of participants and plan sponsors, and crafting offerings to meet both of them. The more they know about those needs, the more they can position themselves as a worthy partner for DC plans.

By Fredrik Axsater, global head and managing director of Defined Contribution at State Street Global Advisors

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.